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Are Attacks on Investor-State Dispute Settlement Justified?

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By William Reinsch: 

One of the most frequently attacked elements of trade agreements and bilateral investment treaties (BITs) is so-called investor-state dispute settlement, or ISDS. This acronym sounds suspiciously like ISIS and is regarded pretty much the same way by trade opponents. 

The term refers to a process within a trade agreement whereby an investor in a country that is part of the agreement can make a complaint against another government alleging that the latter’s actions have treated the investor unfairly and adversely affected the value of the investment. Not every process in every agreement is exactly the same, but in general, the complaint goes to a panel of neutral arbitrators who review the facts and make a ruling as to whether or not the defending country has violated its obligations to provide fair treatment under the agreement. The arbitrators have no power to do anything to enforce their decision other than to order the government to pay compensation. In other words, if a law, regulation or other government action is found to be non-compliant, the decision of the panel does not overturn it. Only the government itself can reverse its actions pursuant to its own laws and procedures. 

There have been a wide variety of criticisms of ISDS, many of them process related — lack of transparency, “un-neutral” or unqualified arbiters, overlap with judicial systems — most of which can be addressed through careful drafting of the provision. Some are simply inaccurate, such as the suggestion ISDS favors big corporations, even though by far the larger number of claims has been brought by small companies, or that it inhibits governments’ right to regulate — which it clearly does not.

Those, however, are distractions. The real argument is about sovereignty. Critics believe that ISDS takes decisions out of our hands and turns them over to “others” — i.e. non-Americans, who by definition are apparently less capable of making a wise decision — and that an adverse decision will create irresistible pressure to change our law, despite the fact that the panels cannot compel it. This is a serious argument that deserves a response.

First, we should remember how ISDS got started in the first place. It was primarily intended to protect developed country investments in developing countries that did not have objective, transparent, and efficient judicial systems. European and American investors had learned through painful experience that investments in some countries could simply be expropriated by the host government, and there was nothing they could do about it because there was no effective recourse. ISDS was a way to get out of that box. Developing country government proved willing to agree to it in bilateral investment treaties because they wanted investment, and this was often a necessary condition.

Over time, however, investment flows have become multi-directional, and as a result a process that was designed to protect “our” guys overseas is now also one that protects the other guys here in the U.S. And, if you believe — as some apparently do — that the United States is incapable of ever committing an unfair act, it is easy to forget how ISDS protects us abroad and instead assume that it will inevitably lead to U.S. laws and regulations being overturned, even though they are clearly fair.

This attitude is fundamentally inconsistent with a global economy. We operate in a world of more than 200 countries, and none of them can function successfully, except maybe North Korea, without a network of rules and agreements that detail how nations are supposed to behave and which rest on commitments from participating nations that they will, indeed, behave. For 60 years, the U.S. has been a leader in constructing this system and an active participant in it. We have been part of the WTO and its dispute settlement process from its inception, and we have numerous bilateral agreements providing for arbitration. We win many complaints and lose some, but we — and the trading system — are stronger for it. To attack ISDS in the name of sovereignty is to take the world back to the law of the jungle that is not rule of law based. That may save us an occasional loss, but it will leave our companies defenseless in many countries, which will do far more damage, both to us — and everybody else.  
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William Reinsch is a Distinguished Fellow with the Stimson Center, where he works principally with the Center’s Trade21 initiative.

Photo credit: go elsewhere via Flickr
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